Even with a significant upturn in instant digital transactions during the Covid years, a significant 39% of demand deposit accounts (DDAs) in the US are still not connected to the Real-Time Payment RTP Network. According to US Bank, The Clearing House’s RTP Network has reached 61% of DDAs yet is actually accessible to banks that hold 75% of these accounts.
Further institutions will no doubt jump on board when the Federal Reserve’s instant payments network, the FedNow Service, launches next year. Nonetheless, in this era of contactless, account to account (A2A) and peer to peer (P2P) transactions it’s surprising that potentially nearly two fifths of bank customers are using products that don’t settle payments straight away.
Road block to moving forward: taking on the legacy challenge
Network rollouts aside, one important reason for this slow adoption amongst some banks is potentially the technical challenges facing large financial institutions - and the cost of introducing digital transformation amongst widespread dependency on legacy infrastructure.
Indeed, research by Capgemini and Sogeti has shown that organizations are investing around 40% of their budgets into hardware and infrastructure and more than 35% on tools - with human resources taking up considerably smaller amounts of budget.
Amongst this backdrop there are, no doubt some banks wondering what benefits come from real-time payments, but lets consider that in a moment.
With all of this in mind, it is perfectly reasonable to understand how some players may be reluctant to jump into this emerging space with both feet and that implementing instant payments could be a project too far.
What can we learn from the UK’s adoption of real-time payments
Iliad Solutions helps banks to test and launch new technology. The business worked closely with the UK banking industry when it went through the process of implementing faster payments infrastructure more than a decade ago. During this process much was learnt.
From very early on for instance, instant payments could be seen to represent a fraud risk. This came about because transactions were authorized based solely on the account numbers given. Just a simple error, like one or two digits being presented incorrectly and money would be sent to the wrong account. Criminals quickly latched onto this and fraudsters quickly learnt how to dupe people into making payments. Without the safety net of a three to five-day settlement period, there was no time to stop suspicious payments and funds being easily transferred instantly into bogus accounts. To the relief of everyone legitimately involved, safeguarding systems have been implemented to ensure account matching across a number of key data points is now used making it difficult for criminals to get away with diverting funds via instant payments.
The scrutinizing process is thorough, sending a payment that needs to settle in real time requires a whole sequence of checks with around half a dozen back-end systems. Simulating these checks before going live is no small undertaking with a legacy framework, and is significantly more involved if attempted manually.
Ways banks are successfully introducing instant payments
With technology being developed at pace, new functionality and products are being added and iterated at considerable speed. Developers coding for six months and then testing for several weeks, as has been the norm, needs to be consigned to history, as this methodology is significant threat to modernisation - and commercial viability.
This challenge can be overcome: there is now technology that allows banks to simulate instant transactions across multiple endpoints. Virtualization of testing saves vast amounts of time and hugely simplifies what is a complex process.
Designed for today’s Agile and DevOps world, automated testing engines leave no stone unturned and can reach every corner of an institution’s infrastructure, not just the new component or module, to ensure modern and old tech are capable of working seamlessly together. As functionality is added to, say, a debit card product, tests can be run automatically.
This type of approach is backed up by Capgemini and Sogeti’s World Quality Report 2021-22, which revealed that a key benefit of test automation was better control and transparency of test activities (according to 1,750 tech professionals surveyed). It seems people feel it improves the process of testing rather than its outcomes.
Crucially, banks should test to prove that new software doesn’t work rather than confirm that it does, for example by simulating unexpected rapid increases in transaction volumes. This way, tests are deeper and more reliable, assessing a wide variety of unforeseen scenarios.
Real-time payments will provide benefits to financial institutions
Some banks may be dragging their heals when it comes to adopting instant payments, as they’re unsure about the benefits, well to them anyway. After all, enabling customers to settle funds in real time doesn’t generate revenue, does it? Actually, real-time payments provide an opportunity to incorporate complementary services such as insurance, investments and foreign exchange. This keeps customers on a platform longer and appreciative of the convenience multi-service offerings brings, so not only increases potential revenue opportunities but can improve customer loyalty too.
It also presents a chance to deliver embedded payments benefits to consumers who are becoming increasingly used to accessing financial services within non-financial platforms such as Amazon and eBay. Once experienced, any service falling short of this accessibility and convenience, just doesn’t cut it anymore.
When considering the benefits, there are few reasons to delay adopting instant payments and giving customers - both business and retail - the same kind of modern digital experience in banking that they encounter in other areas of their lives, such as with Netflix, holiday reservations, or clothes purchases.
And thanks to modern tools, those banks that are yet to join the Real-Time Payments Network can ensure even more DDAs can send and receive funds instantly.
World Quality Report 2021-22, https://www.capgemini.com/gb-en/research/world-quality-report-wqr-2021-22/
The Clearing House , https://www.theclearinghouse.org/payment-systems/rtp/institution
Iliad Solutions , https://www.iliad-solutions.com/news/ten-things-ceo-know-testing-payments/
Independent Banker (February 2022) , https://infodisplay.infodesk.com/item/f6d94b4a-8731-475e-bd1a-6be57091b37c.html?CU=frb9976&APP=6